Internalized Gas Costs

What is meant by "internalized costs"?

Internalized costs are the costs which can be accurately accounted for in our current systems. In energy production, these costs typically consist of capital costs, financing costs, operation and maintenance costs, and exploration costs. Some energy options incur these costs in various stages such as extraction, transportation and refinement. Profits and taxes are excluded wherever possible in order to isolate the pure cost of production.

With the ongoing shale-gas revolution in the US, the cost of gas has enjoyed a lot of attention in recent years. Take a look at the image below for the divergence between US and world gas prices. This large drop has given the US economy a much-needed lift and also resulted in rather impressive CO2 reductions as cheap gas displaced some coal.


Internalized costs of gas

The International Energy Agency has compiled the cost curve for global gas reserves shown below. Since transport is an essential component of natural gas costs, this is given as well. Pipeline costs are given per 1000 km.


The potentially very large contribution of unconventional gas reserves is clearly visible in the above figure. Although very cheap resources (<$3/MMBtu) are not available from unconventional sources, a lot of affordable fuel is available from these sources. Shale gas and coal bed methane (CBM) appear to be especially promising.

Breakdown of gas consumption

Natural gas is used primarily for industrial purposes (40%), power generation (37%) and residential & commercial heating (22%) (BP Energy outlook). Transportation is also a small (1%) but growing factor. Industrial uses include a number of processes where natural gas is an important chemical feedstock, but most applications utilize natural gas as a practical and economical heat source.


Natural gas electricity is rather unique in the sense that power plant capital costs are generally quite small relative to fuel costs. This ties a large degree of flexibility to natural gas power. Plants can be operated at low capacity factors to follow load, mothballed in response to tightening market conditions and constructed fairly rapidly if the market demands it. 

Limited information is available on the capital costs of natural gas power plants, but the EIA regularly releases estimates for the case of the US. Natural gas combined cycle plants in the US cost about $1000/kW, but it is possible that developing nations like China and India would be able to construct them for half this cost, while Europe should be significantly more expensive. The figure below gives the LCOE for three plant capital cost scenarios as a function of fuel costs. Additional assumptions include a 40 year service life, 55% electric efficiency, a capacity factor of 75%, a low 5% cost of capital to remove profit-taking from the financial industry and $6/MWh of O&M costs. The Excel datasheet used to create this figure can be accessed here.


It is clear from the figure that changes in plant capital costs only have a minor influence on the overall LCOE.


The cost of heating is given below as a function of the natural gas price.



Natural gas can be used for transport either directly in modified internal combustion engines or in regular vehicles through gas-to-liquids processing. The IEA gives the cost of one barrel of oil-equivalent final fuel from gas-to-liquids processing as $60-100. Effective fuel costs are given below as a function of both oil-equivalent and direct natural gas costs. Keep in mind that compressing or liquefying natural gas will impose additional costs possibly in the range of $1-4/MMBtu.



In order to assist in finding the consensus view on the internalized costs of gas energy, please follow these simple commenting guidelines:

Three types of comments are welcome, each introduced by a keyword:

  1. DATA: Please give your opinion on any of the numbers presented in the article. Of particular interest is the average global production and transportation costs of gas ($/MBtu). Each DATA comment will be weighted by the number of "likes" when the data is ultimately processed.
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  3. CORRECTION: If you see a serious error in the numbers presented in the above analysis, please correct me (with a reference) so that I can correct the article.

Miscellaneous guidelines:

  • Make sure your comment gives only one piece of information (use multiple comments for multiple pieces of information).
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  • Externalities and other energy options are off-topic.

Many comments are welcome. More data = greater accuracy.